I just finished watching 60 Minutes with its profile and interview of Federal Reserve Chairman Ben Bernanke. He confirmed what we all knew: the Fed is printing money to provide capital to at risk financial institutions.
(Picture from Federal Reserve web site)
It is not your old fashioned printing press money. It is modern money where someone logs into the Fed computer and makes a journal entry that puts money in a private institution's account. Just like if you turned in a deposit slip for $3,000 dollars and the teller accidentally inputs it as $3,000,000. If the bank never notices, then your checks clear just fine for a long time.
What to make of this? Taken at face value, this is actually two bets.
- The fed is betting that capitalizing these institutions with new money will help restore confidence so that private money will eventually provide the capital, restoring normal solvency and stable credit markets.
- After stabilization, the Fed is betting that it can take the "printed" money back off the books at the right time to avoid the inflation that normally results when money is printed.
These are both big bets. Which do you think is the bigger risk?
The second one seems the more obvious choice since market timing is one of the hardest things to do. In effect, the Fed is trying to time the whole economy. It's hard for me to see how any human being is smart enough to do this. The odds are they will wait too long and we will get inflation. The biggest risk is that if the first bet doesn't help the economy then we will have stagflation again like the 1970's.
This is why I am thinking that the riskier bet is the first one. Here's why:
- Bernanke admits in the interview that there is private money sitting on the sidelines that could be fueling credit.
- The explanation offered for why the private money isn't investing more is that they can't tell which players are good investments and which are bad. This is the potential catch 22.
- The Fed interventions and non-interventions are disguising the market. Private money has to wait to see whether the Fed made good decisions or whether the Fed will stop "printing money."
So, the Fed intervention is intended to create a safer environment for private money but short-term at least, it is deterring private money. As with any non-linear "system," it is almost impossible to predict what set of events will break the current equilibrium/disequilibrium allowing progress (lending and economic growth) or regress (longer recession).
This is all rather depressing isn't it? Well, there are inklings of good news. Whenever you see banks rejecting TARP money or paying it back early, even if it is just to keep the government off their backs, then that means private money is willing to take its own risks again.
Therefore, you should root for the rich guys to tell the government to take their money and shove it. After all, you never really wanted to give them the money anyway.